So often what looks like a trend turns out to be just a fad. Consider Exhibit 1: the Segway. Weren’t we promised this would revolutionize urban transportation? When did you last see one? When was the last time you even saw a mall cop riding one?

How about another trend-slash-fad? Reshoring. Four years ago we took a look at this, speculating on whether it was a trend with staying power. (“Beyond a Buzzword: Will US Manufacturing See More Reshoring in 2017?” for those who want dive into the archives.) Well we’ve just revisited this topic and here’s what we found.

Reshoring Explained

Reshoring refers to bringing manufacturing work back to the US. It’s the opposite of the offshoring that went on in the 1990’s and accelerated in the 2000’s. That was when manufacturers found they could cut their costs by moving production to countries with low labor and other costs. One of the first industries to do this was textiles, but it quickly spread. Chemical production, pharmaceuticals and even fabrication work all felt the lure of cheap labor.

Today the offshoring tide has turned. Companies are finding advantages in producing here in the US and so they’re bringing work back. That’s reshoring.

The Drivers of Reshoring

If offshoring was once thought essential, what’s changed? Actually, quite a lot has changed, but for simplicity we can use four headings:

  • Cost of doing business in China is rising
  • Growing recognition that Total Cost of Ownership (TCO) matters more than piece part cost
  • Supply chain challenges coming to the fore
  • Automation and advanced manufacturing technology

Let’s take a closer look at each.

Cost of Doing Business in China

China is becoming a more expensive place to make stuff. That’s largely because wages are rising faster there than they are here. The other factor to note is that the Chinese authorities are getting stricter about environmental regulations.

Starting with labor costs, ten years ago the Bureau of Labor Statistics reported that, “Hourly compensation costs in China’s manufacturing sector nearly tripled between 2002 and 2009, calculated on a U.S. dollar basis”.

Then, in 2017, (shortly after our last look at reshoring trends,) CNBC said of Chinese labor costs, “Average hourly wages hit $3.60 last year [2016], spiking 64 percent from 2011.” And most recently, Statistica.com said, “As of 2019, the average wages in China increased by 9.8 percent compared to the previous year.”

While no one would argue that Chinese workers are highly paid, the trend is clear: costs are going up.

Now let’s turn to enforcement of environmental regulations. To date, it’s chemical manufacturers who have been hit hardest. A slew of accidents and pollution incidents have prompted authorities to dramatically tighten regulations. (A devastating explosion at a chemical plant in Jiangsu Province that killed 78 people in 2018 is just one example.) Many businesses have been forced to close up, and those that remain face higher costs.

Many in the west will argue this “leveling of the playing field” was overdue, and so far chemical companies have been the focus. It seems inevitable though that other industries will at some point also be required to clean up.

Total Cost of Ownership vs. Piece Part Cost

Credit where it’s due: Total Cost of Ownership (TCO) is a concept the Reshoring Initiative has been promoting for some years. Their point is that when thinking about offshoring there are many more costs to consider than just what you’ll pay per piece. To help with analysis they have a tool on their website, reshorenow.org, that manufacturers can use to estimate the total cost of getting things made overseas.

This encapsulates a lot of things we all knew but hadn’t figured out how to factor in to financial calculations. Two examples:

  • Lower quality means more waste and higher warranty costs
  • Shipping times and port delays can add three to four months to inventory

We’ll leave it to you to dig in further, but here’s the takeaway: there’s growing recognition that manufacturing overseas rarely yields the savings expected.

Supply Chain Challenges

Air freight being horrendously expensive, almost everything made in Asia comes to the US by sea. That’s a slow process with unpredictable delays due to weather and customs. However, it can easily take a container three months from leaving the factory to reaching a US warehouse, and four is not uncommon.

This imposes a lot of inventory costs, (see above) and also reduces flexibility. What happens if a customer gets tired of waiting and cancels an order while it’s at sea?

There’s another side to this too. What happens if something goes wrong at the manufacturing location? The lockdown in Wuhan earlier this year left US and European manufacturers without the components they needed. We’ve seen the same thing happen with earthquakes too.

Then there are political challenges, the “Trade Wars.” Tariffs can make imported goods a lot more expensive and play havoc with your product costings.

Not surprisingly, many manufacturers have had enough of disruptions they can’t control and are rethinking their sourcing. Domestic suppliers may not have the cost advantages of their Asian competitors, but neither do they pose the same risks. Getting things made close to where you need them makes supply chain management a whole lot less challenging.

Automation and Advanced Manufacturing Technology

One of the reasons manufacturers automate is to reduce the labor content in what they make. Another reason is to improve quality. Together, these reduce the cost advantage of manufacturing overseas. (Automation costs much the same, regardless of where it’s implemented.)

Here in the US manufacturers have been investing heavily in automation. You need only look at robot sales figures to see the truth in this: 2019 saw almost 30,000 robots delivered to US manufacturers. That certainly levels the US-China playing field!

In parallel, advanced technology lets manufacturers do things faster and add new capabilities. Just look at our fabrication shop. We’ve invested in CNC punching, cutting and bending equipment, along with robotic welding, all to increase quality, cut costs and give our customers more.

It’s the same story in manufacturing plants across the US. Investing in automation and advanced technology helps us out-compete countries with cheap labor.

Numbers are Up

Segways weren’t the world-changing trend we were led to expect. Reshoring however seems to be something different. Four years ago we asked if it was just a buzzword. Halfway through 2020 the Reshoring Initiative projected the year would see 110,000 manufacturing jobs brought back to the US. (Access their data here.) More significantly, that will bring the total number of jobs reshored in the last decade to over 1 million. That’s definitely a trend and not a fad.